April 9, 2018
Yield spreads between new-issue hybrid ARMs and Treasuries were stable this past week and have managed to lag the tightening experienced in fixed-rate MBS.
As expected, March was one of the weaker months on record in terms of issuance, with volumes totaling just $991mm, a decline of $273mm from the previous month. There was a noticeable decline of over 30% from the previous month for 3/1s and 5/1s, while 7/1s continued to make up the largest component of originations at 40%. Supply should rebound in April based upon current loan originations.
March prepayment speeds increased across most of the MBS market. Technical factors drove most of the increase, as day count (+3) alone drove about a 10% fractional increase. Prepayments were mixed for ARMs and the magnitude of the increase varied across MTR buckets. In general it appears that longer reset ARMs increased less, while post-resets increased the most, speeding up 5CPR on the month.
In aggregate, Fannie ARM speeds increased 3.8CPR to 21.3CPR. Libor-based Fannie 5/1s increased 4.2CPR to 26.3CPR, 7/1s climbed 3.7CPR to 18.0CPR, and 10/1s rose 1.5CPR to 13.4CPR. In the Freddie sector, 5/1s, 7/1s, and 10/1s paid 27.6CPR (+5.0CPR), 17.2CPR (+3.6CPR), and 12.6CPR (+1.3CPR), respectively.
Ginnie ARM speeds were less volatile, as most of the increase can be attributed to technical factors. In aggregate, Ginnie speeds increased 13.2% or 2.6CPR, to 22.3CPR.
Last week, activity was primarily focused on the following:
- Short Resets – Lower premiums and the recent increase in LIBOR (see graph below) has contributed to higher yields on these pools. Investors are targeting conventional short resets (6- to 18-MTR with 5/2/5 cap structures) to potentially benefit from further increases in market interest rates. In many cases, current prepayment activity shows the temporarily elevated levels common to bonds nearing their initial reset dates. However, based on historical patterns, prepayment activity generally declines after the bonds reset. Using a vector to model this behavior shows that seasoned short resets can compare favorably to other adjustable rate alternatives.
- GN 3/1 2s – Demand has picked up for this product as buyers have resurfaced after spreads widened out 12 bps during March.
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG